When planning ahead, a key consideration is planning for incapacity. Not everyone becomes incapacitated. But if you lose the ability to make your own choices, someone else will need to make decisions for you. By planning for possible incapacity, you can name the person you want to act for you. But otherwise the courts will have to get involved, which involves extra cost, time delays, red tape and headaches through a court-appointed guardianship. Moreover, a guardianship can provoke family friction. You can promote family harmony and avoid a guardianship if you plan ahead.
Incapacity can happen to adults in various ways. Often it is the result of a severe stroke, major accident with head trauma, mid-to-later stage Alzheimer’s, or other diseases. Whatever the cause, you don’t want to rely on the Court to choose who will make decisions for you.
In some respects, incapacity planning is even more important than inheritance planning. For inheritance planning, you’re directing who inherits from you after your passing. That is a good idea and it helps your family….after you’re gone. But incapacity planning can directly affect you while you’re alive.
For incapacity planning, there are four tools to have in place, as follows:
- Power of attorney for finances;
- Power of attorney for health care, including a living will;
- Medical privacy release (a HIPAA release); and
- Particularly for a single person, or for a married couple where one spouse is facing a diagnosis of Alzheimer’s or other debilitating disease, an revocable or irrevocable trust may be needed, too.
In your power of attorney for finances (often called a “durable power of attorney”) you can name who you’d want to make your financial decisions if needed. The health care power of attorney will appoint your health care agents, to make medical decisions. Your living will can either be part of the health care power of attorney or a separate document, and it states your directions for end of life care, if you can’t make or communicate those decisions your self. The medical privacy release allows the doctors and health care providers to talk with you under the restrictive HIPAA rules. In each situation, you should name one or more people to make the decisions initially, and also have someone named as backup. For example, if you’re married you may want your spouse as the primary person, and then your children as secondary. You could name your children to act separately and in order, or they could act together as co-agents.
Not everyone needs trust-based planning. But particularly for a single person, or for a married couple where there are memory or mobility concerns, the right type of trust-based planning can be crucial to preserving assets and protecting the surviving spouse.
Example: Marge is widowed and lives at home alone. She has a house and money in the bank. She names her children as her agents under a statutory short form power of attorney (often about one or two pages long, with brief sentences about the authority granted to the agents). Unfortunately, when she becomes incapacitated, the bank refuses to honor the power of attorney and says that the children cannot act under it. Having her house and bank accounts inside of a living trust could have allowed the children to act as successor trustees with more authority. In addition, the right type of irrevocable trust could have protected the house and some or most of the bank accounts against future spend-down for Medicaid. The trusts have the additional benefit of reducing probate, too.
What type of incapacity planning is right for you? There is no one answer that applies to everyone. It will depend on your health, family, income, assets and your personal preferences. An experienced elder and estate planning attorney will be able to walk you through the decisions you need to make. You’ll feel better knowing that you’ve taken an important step in protecting yourself, your family and your retirement nest egg.